1. Field of the Invention
The present invention relates to administering and facilitating financial transactions. More specifically, the present invention relates to automated handling of financial transactions known as Tri-Party Repurchase Agreements, which are also commonly known as tri-party “repo” agreements.
2. Description of Related Art
A repurchase agreement or “repo” agreement (or, simply, “repo”) is a contract giving the seller of an asset the right or obligation to buy back the asset at a specified price on a given date. Generally speaking, a repo agreement is a form of short term borrowing for dealers in various types of assets, e.g., government securities, loan obligations, etc. The dealer sells the assets to investors, usually on an overnight basis, and buys them back the following day. For the party (e.g., a dealer) selling the assets (and agreeing to repurchase it in the future) it is a “repo”; for the party (e.g., an investor) on the other end of the transaction (buying the asset and agreeing to sell in the future), it is a “reverse repurchase agreement.” However, the transaction is often just simply termed a “repo” by both parties. A repo is similar to a secured loan, with the lender of money receiving assets as collateral to protect against default. The legal title to the assets passes from the dealer or seller, i.e., the provider of the collateral, to the investor, i.e., the party providing the money.
For the buyer or investor, a repo is an opportunity to invest cash for a custom period of time, typically overnight, as mentioned (whereas other investments typically involve whole numbers of months). Moreover, a repo is a short-term and secure investment; in return for investing, the investor receives a rate of interest as well as collateral to secure the investment.
For the dealer or seller, repos are used to cost effectively finance long positions.
In practice, a repo agreement can be transacted in several ways. In a first way, the investor and the dealer negotiate with one another and close an agreed-to deal without any outside assistance. The dealer then would deliver securities to the investor and the investor would deliver cash to the dealer. This is typically referred to as a “DVP repo,” or “delivery versus payment repo.”
A second, more common way to effect a repo transaction is to involve a trusted third party, or intermediary, to match the details of the trade agreed between the seller and the buyer, and to assume all of the post trade processing and settlement work related to the trade; this is typically referred to as a “tri-party repo.” The third party is typically a bank. As illustrated in FIG. 1, in a tri-party repo, the third party acts as a “tri-party repo service provider” 110 to the two principal parties in the underlying trade, i.e., the broker/dealer/seller 120 and the buyer/investor 130. Typical types of underlying trades include not only repurchase agreements, but also securities lending agreements, loan agreements, derivatives agreements and others.
FIG. 2, shows a generic transaction flow for a tri-party repurchase agreement where a service provider (typically a custodian bank) is disposed (logically speaking) in the middle of the transaction to ensure that each party to the transaction is never without either cash or assets throughout the term of the transaction, thereby ensuring that both parties are “whole” at all times. The presence of the third party service provider not only brings an additional layer of security to the transaction, but it also brings efficiencies and reduced costs for both principal parties to the trade.
In the tri-party repurchase agreement transaction flow shown in FIG. 2 and beginning at 200, a dealer/seller/borrower/trader and an investor/buyer/lender first agree, between themselves, on a particular trade at 210. Thereafter, the third party service provider receives trade instructions from both the dealer and the investor at 220. An account administrator at the tri-party repo service provider then matches the instructions from the investor to the instructions received from the dealer at 230 or the investor can directly “match”—or confirm—the details of the trade directly on a repo system. Once a match has been confirmed by the account administrator, the investor delivers the agreed-upon cash or loan amount (such as loan amount 150, illustrated in FIG. 1) to the tri-party repo service provider at 240. At essentially the same time, the tri-party repo service provider already maintains assets on behalf of the dealer and may receive additional assets from the dealer via other methods including files, pledges or repos. The tri-party repo service provider thereafter confirms to the investor that all, some or none of the assets are eligible per the tri-party agreement, and applies applicable margin to the assets per the tri-party agreement at 250. The assets are segregated in an escrow account established in the name of the investor at 260. The tri-party repo service provider also transfers the cash/loan amount to the dealer at 270 and the transaction flow process ends at 280.
As mentioned above, conventional tri-party repo markets may facilitate trades involving whole loans as well. Instead of securities, the collateral is in the form of unsecuritised, mortgage backed, residential and commercial loans but may include other asset types such as credit card receivables, auto loans and other consumer loans.
In mortgage whole loan repos, the lender obtains a claim (equal to the amount of the loan) against an underlying property. Consumer whole loan repo collateral is typically in the form of credit card or automobile receivables.
Conventionally, daily files at the trust receipt level or loan level indicating balances are sent from the dealer to the tri-party repo service provider. The file information includes a description, price and balance of the whole loan; loan descriptions include conforming, non-conforming, multi-family, commercial, non-performing but may include other asset types. Trust receipts and assignment letters are delivered to tri-party repo service provider for safekeeping.